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When financially planning for your retirement, the main objective is to keep from running out of money in the later years. There is a significant portion of the retirement community that relies on portfolio securities as their primary source of income. These are often pre-tax accounts such as 401(k) plans or roll-over individual retirement accounts (IRA).


Safe Annual Withdrawal Amount


To maintain portfolio value throughout retirement, the long-held belief has been that the maximum safe annual withdrawal amount should equal 4% of your initial portfolio value. The notion continues that the same dollar amount, adjusted for inflation, would then be withdrawn every subsequent year to maintain your portfolio. This withdrawal period/frequency delivers a 90% or greater probability that the account will have sufficient funds to make these annual payments for at least 30 years1.


Unfortunately, there are several factors that could risk depleting your portfolio account too early in retirement such as excessive spending or having to make withdrawals to cover living costs when investments are down.


If you find that a “safe” withdrawal rate is not sufficient for your needs, you may be faced with finding alternative income sources, or withdrawing investments at what would be considered an excessive rate. Withdrawing more than the safe amount, coupled with the risk that investments may not perform as projected, greatly increases the odds of running out of retirement funds.


Using home equity with a reverse mortgage can be a reliable strategy for coping with these risks, but the point in your retirement at which you get a reverse mortgage can make a big difference in your long-term wealth. The reverse mortgage credit line is the feature described in this article as a tool for protecting your portfolio.


Letting Your Largest Asset Work for Your


The conventional way of thinking proposed is that home equity should only be in retirement funding plans as a last result when your portfolio is exhausted, however this passive approach does not adequately account for economic downturns that can result in a lower portfolio valuation.


Alternatively, there are active strategies for using home equity in conjunction with your portfolio account earlier in retirement to greatly increase your probability of cash flow survival.


Active Retirement Funding Strategies


One of these active strategies takes advantage of a reverse mortgage credit line at the start of retirement, but withdrawals are not taken from the line of credit every year. Instead, a coordinated strategy considers the performance of your investment accounts. The overall performance of your portfolio is determined at the end of the year. However, if the performance was positive then the next year’s income withdrawal will come from your portfolio account, if the performance was negative then the next year’s income will be withdrawn from the reverse mortgage credit line.


By implementing this coordinated strategy, the your cash flow needs would be met, regardless of investment performance. At the same time, the portfolio is protected from early depletion since income is only withdrawn during periods of positive investment performance.


Portfolio Protection


Using a reverse mortgage as an additional income source to maintain a safe withdrawal rate, or as an alternate income source during poor investment performance years, help to protect your portfolio from early depletion. In addition, research shows that incorporating home equity with a reverse mortgage early in the retirement years, rather than as a last resort, could result in a higher overall net worth, easing concerns of the heirs, while providing increased spending success to the parents.


Reverse mortgages, with their built-in consumer safeguards and flexible options for accessing equity, are transforming the way people approach retirement. With any financial decision, it is important to carefully consider your options. The right financial advisor can guide you to a great decision that works


1Bengen, William. 2006.
“Sustainable Withdrawals.” In Retirement Income Redesigned, edited by Harold Evensky and Deena B. Katz. New York: Bloomberg Press.

This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.